While value investors return to Japan near term earnings risks remain
We will keep this week’s publication fairly brief as there have been no major developments to address as clamer markets seem to have prevailed for now. However, Japan’s stock market is getting much attention from global asset allocators as prospects of improving shareholder returns and low valuations are raising hopes for more capital inflows. Indeed, news of Warren Buffett looking to raise exposure to Japanese stocks is also validating value investors’ growing interest in our market.
Although this inflow of longer term money is indeed very encouraging for outlook of Japan’s stock market activity, it is difficult to ignore the continued weakening of US demand compounded by the ongoing credit contraction and the poor earnings picture for Japan’s big multinationals and exporters in the near term horizon. With earnings season about to begin and 3/24 guidance likely to be fairly cautious, we think short-term risks remain skewed to the downside. Add the likelihood of US government further tightening its export curbs in technology to China, and the picture gets murkier still.
To be sure, there are some good reasons to remain hopeful in the medium term as some green shoots are appearing from the gradual recovery in China’s economy as well as rebounding of Japan’s auto output from the past two years of supply constraints. We also retain our bullish stance in more domestic-oriented segments of the market as higher wage growth, benefits of post-Covid re-openings as well as the surging of inbound tourism in Japan provide notable opportunities to capture alpha.
Furthermore, we continue to favour Japan’s banks which we feel look relatively insulated from recent global banking turmoil as much of the duration risks have been nationalised by BOJ’s massive JGB purchases. Given that Japan’s interest rates are more likely to rise as its central bank has little choice but to normalise its monetary policy while growing evidence of disinflation taking hold in the US caps treasury yields, we retain our bullish outlook of the Japanese currency.